Capital Budgeting Techniques for Comparing Investment Criteria
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Consider the following two mutually exclusive projects: whichever project you choose you require a 15% return on your investment. Round answers (a-d) to two decimal places and (e) to three decimal places.
Year Cash Flow (A) Cash Flow (B)
0 -$294,055 -$32,324
1 17,844 13,773
2 29,642 9,531
3 32,787 10,151
4 394,310 12,887
a. The payback period for Projects A and B is_____ and____years. If you apply the payback criterion, which project will you choose? Project A or B ? Round answer to 2 decimal places.
b. The discounted payback period for Projects A and B is____and____years, If you apply the discounted payback criterion, which project will you choose Project A or B ? Round answer to 2 decimal places.
c. The NPV for Projects A and B is $____and $____, If you apply the NPV criterion, which project will you choose Project A or B? Round answer to 2 decimal places.
d. The IRR for Projects A and B is____percent and____percent If you apply the IRR criterion, which project will you choose A or B? Round answer to 2 decimal places.
e. The profitability index for Projects A and B is____and____, respectively. If you apply the profitability index criterion, which project will you choose A or B? Round answer to 3 decimal places.
f. Based on your answers in (a) through (e), you finally choose Project
A or B_______? , Why______?
A. a. 3+(213,782 / 394,310)= 3.54216733 = 3.54 yrs
b. 2+(9,020 /10,151)=2.888582406= 2.88 yrs
*(numbers 2,3,4 are exponents in each problem -- Is there a way for me to write the numbers as exponents for this program?)
B. a. 17,844/1.15 + 29,642/1.15 2 + 32,787/ 1.15 3= 59488.11704
394,310 / 1.15 4= 225448.0223
3+(294,055 - 59488.11704/225448.0223)=
3+( 294054.7361)= 294057.7361 =3.61yrs
b. 13,773/ 1.15 + 9,531/1.15 2 = 19183.32703
10,151/ 1.15 3= 6674.447275
19183.32703 / 6674.447275= 2.874144665 = 2.87yrs
C. NPV=
a. -294,055 + 17,844/ 1.15 + 29,642/ 1.15 2 +32,787/1.15 3 + 394,310/ 1.15 4= -24619.8659 or is it 563490.1341 ?
b. -32,324 + 13,773/1.15 + 9,773/1.15 2 + 10,151/1.15 3 + 12,887/1.15 4= 1084.94515
D. IRR
Can you please help me with the IRR which should bring the NPV back to 0, I think it can be done using a spreadsheet.
E. PI
a. 269435.1341 / 294,055 = .916274622
b. 33408.94515/ 32,324 = 1.033564693
F. Which project should i choose and why?
i have the same problem yet with these numbers.
Year Cash Flow (A) Cash Flow (B)
0 -$168,156 -$27,484
1 15,885 12,243
2 32,152 12,669
3 32,860 10,751
4 342,460 9,531
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Solution Summary
This explains the evaluation of the project through various capital budgeting techniques by using various examples.
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Payback period
TABLE-I
CASH FLOWS MACHINE A Cumulative cash flow MACHINE B Cumulative cash flow
YEAR 0 -294055 -294055 -32324 -32324
YEAR 1 17844 -276211 13773 -18551
YEAR 2 29642 -246569 9531 -9020
YEAR 3 32787 -213782 10151 1131
YEAR 4 394310 180528 12887 14018
A. a. 3+(213,782 / 394,310)= 3.54216733 = 3.54 yrs
b. 2+(9,020 /10,151)=2.888582406= 2.88 yrs
Your calculations are correct
Recommendations: Project B will be choosen as it has less payback period. It means that it will recoup its cash oulay ...
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